DMC Global Inc (BOOM) 2015 Q3 法說會逐字稿

Greetings and welcome to the Dynamic Materials Corporation 2015 third-quarter conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host for today, Mr. Geoff High, Director of Investor Relations. Mr. High, the floor is yours, sir.

Good afternoon and welcome to DMC's third-quarter conference call. Presenting on behalf of the Company will be President and CEO Kevin Longe aand Chief Financial Officer Mike Kuta.

I would like to remind everyone that matters discussed during this call may include forward-looking statements that are based on management's estimates, projections and assumptions as of today's date and are subject to risks and uncertainties that are disclosed in our filings with the SEC. The Company's business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements. DMC assumes no obligation to update forward-looking statements that become untrue because of subsequent events.

A webcast replay of today's call will be available at dmcglobal.com after the call. In addition, a telephone replay will be made available approximately 2 hours after the call. Details for listening to the replay are available in today's news release.

With that, I'll turn the call over to Kevin Longe. Kevin?

Thanks, Geoff, and good afternoon, everyone. Our third-quarter sales of $39.5 million were off 24% from last year's third quarter or 17% if you exclude the impact of foreign currency translation. Much of this decline was due to the steep drop in capital spending within the global oil and gas markets.

Sales at DynaEnergetics, our oilfield products business, were $18.2 million, down 36% versus last year's third quarter or 30% if you exclude the effect of foreign currency translation. Sales in North America, which is DynaEnergetics' largest market, were down 22% versus the year-ago third quarter. Most energy service companies are reporting year-over-year revenue declines in North America of 50% or more.

Continued unit sales growth of our advanced DynaSelect switch detonator, which is being used primarily in North America's unconventional oil and gas fields, has helped to mitigate the impact of much lower well completion activity in the United States and Canada. For the year-to-date period, unit sales of DynaSelect were up 4% versus the first nine months of 2014.

Third-quarter sales at our NobelClad business were $21.3 million, down 10% from last year's third quarter or 2% if you exclude foreign currency translation. NobelClad sales were below our original expectations, due in part to the timing of shipments that were impacted by a strike at a primary metal supplier.

We also experienced delays in the receipt of certain anticipated orders, which are now expected during the fourth quarter and into 2016.

NobelClad did report its strongest bookings since the second quarter of 2014 and also saw an 11% sequential improvement in its order backlog. Orders were primarily from the downstream oil and gas and petrol chemical markets and included one of the two large chemical projects we referenced in our last call.

Consolidated gross margin for the third quarter was 26% versus 29% in last year's third quarter. The decline resulted from a less favorable product mix and the impact of lower sales volume on fixed overhead costs. Third-quarter gross margin at DynaEnergetics is 32% and 21% in NobelClad. Excluding restructuring costs, we reported a third-quarter operating loss of $656,000. Approximately $338,000 of the loss was bad debt expense, primarily at DynaEnergetics.

Loss from continuing operations, excluding restructuring costs, was $4 million or $0.29 per diluted share. This included other expense of approximately $1.5 million, which was related to unrealized foreign currency transaction losses. At the business level, DynaEnergetics reported a third-quarter operating loss of $655,000, which included $237,000 in restructuring expense. NobelClad reported operating income of $1.7 million, which included $48,000 in restructuring expense.

Consolidated third-quarter adjusted EBITDA was $2.5 million. DynaEnergetics reported adjusted EBITDA of $1.1 million, while NobelClad reported $2.7 million.

Shortly after the close of the third quarter, DynaEnergetics entered into a principal partner agreement with Weatherford International for the commercialization of our new factory-assembled DynaStage perforating system. Weatherford is aggressively expanding its presence in the North American completions market and has adopted DynaStage as a key tool for helping customers drive down costs while improving safety and operating efficiencies at the wellhead.

DynaEnergetics and Weatherford already have performed product demonstrations for some of the world's leading exploration and production companies, and these presentations will continue across Weatherford's North Americas service territory.

Initial interest in the system has been encouraging, and Weatherford is currently responding to several requests for proposals. This marketing process also is expanding interest in DynaEnergetics' broader portfolio of perforating products. DynaEnergetics is in discussions with several other large oilfield service companies interested in deploying the DynaStage system.

The success of DynaEnergetics' new technologies has helped blunt the full force of the downturn in the oil and gas sector. However, the business has not been immune to the very difficult conditions in the industry. Customer spending deteriorated beyond our expectations during the latter stages of the third quarter and, based on customer indications and the continued decline of the US rig count, it appears limited drillings and completion activity will persist well into 2016. We have taken steps to further streamline operations and align our cost structures with market demand. DynaEnergetics has reduced the headcount at its headquarters in Troisdorf, Germany, and instituted a shortened work week at its German production facility. It has also consolidated an additional distribution facility in Texas and eliminated shifts at both of its US manufacturing sites.

While we will evaluate additional cost control measures and consolidation opportunities going forward, we do not intend to alter the fundamental structure of the Company. We are firmly committed to the strategy we have been executing during the past two years and believe our investments in new products, technologies, customer support and market development have significantly strengthened both of our businesses.

DynaEnergetics, which has always offered outstanding technologies but historically had only limited upper market exposure, has established partnerships and customer relationships with many of the leading service companies and operators in its industry. NobelClad has strengthened its relationships with the world's top industrial companies, and engineers are increasingly specifying our clad plates for their processing equipment.

We are confident in our strategy, and investments have positioned DynaEnergetics and NobelClad to emerge from the downturn as much stronger businesses that are poised to outperform their peers. In the meantime, we will maintain a sharp focus on cost containment and free cash flow generation.

With that, I'll turn things over to Mike for some additional detail on our financial results. Mike?

Thanks, Kevin, and good afternoon, everyone. Starting with expenses, selling, general and administrative costs were $9.9 million or 25% of sales versus $10.1 million or 19% of sales in last year's third quarter.

As Kevin mentioned, SG&A included $338,000 in bad debt expense, principally at DynaEnergetics, as well as increased product development and marketing costs. These increases were partially offset by lower stock-based compensation expense, reduced salaries and wages, and lower commissions.

Amortization expense was $1 million or 3% of sales versus $1.6 million or 3% of sales in last year's third quarter. We reported income tax expense from continuing operations of $1.6 million, despite our operating loss. As we have discussed previously, several of our international business entities are in a cumulative loss position, and we have reported valuation allowances against the tax benefits. When these businesses transition to profitability, the valuation allowances will be reversed.

Turning to our balance sheet, we ended the quarter with cash and cash equivalents of $8.6 million and working capital of $71.8 million. Current liabilities were $24.8 million, and total liabilities were $71.7 million. Our net debt position has increased to $27.4 million from $13.4 million at the end of 2014, which reflects investments DynaEnergetics has made in DynaStage component inventories, as well as cash required for our restructuring efforts.

Given our increased debt levels and the downturn in our primary market, we are closely managing cash and monitoring our compliance with the financial covenants in our credit agreement. We used cash from operations of $6.4 million during the nine-month period, which reflects our net loss position and increase in working capital.

Turning to guidance, we are revising downward our 2015 full-year financial forecast to reflect the deteriorating conditions in the global oil and gas industry. We now expect full-year sales to be down 17% to 22% from the $202.6 million we reported in 2014. We previously were expecting a sales decline of 8% to 12%. Gross margin is expected in a range of 25% to 27% versus our previously expected range of 26% to 28% and the 30% we reported in 2014.

For the fourth quarter, we expect a revenue decline of 25% to 30% from the $52 million we reported in the 2014 fourth quarter. We expect gross margin in the range of 24% to 26% versus the 30% we reported in last year's fourth quarter. We expect selling, general and administrative expenses of approximately $9.5 million to $10 million. Amortization expense is anticipated to be approximately $1 million. The previously mentioned restructuring efforts should result in fourth-quarter charges of approximately $500,000.

And now we are ready to take any questions.

(Operator Instructions) Edward Marshall, Sidoti & Company.

So the question I have to start is the move to commercialization of the DynaStage gun system, and including the recent contract with Weatherford, as I look into the guidance into 4Q, my understanding was that you are giving that away with zero margins. And as I look at the guidance -- both, I guess, sales and margin -- there's really no improvement in the operations of the business line on a sequential basis. So I'm just trying to figure out exactly what's implied in the guidance for that particular business line.

A couple things. First of all, the margin -- we have moved from testing of the product from a development standpoint, which was at cost comparable to what previous gun systems would cost, to the commercial introduction with Weatherford, and the margins have improved dramatically. We are at a different selling price going forward than we were in the testing period.

What you are seeing is and we are in commercial sales with Weatherford that are beginning to ramp, and I think the emphasis there is beginning to ramp. We are currently working with Weatherford promoting the product and helping them as well as ourselves to explain the benefits to the larger E&P companies. And we fully expect that this program is going to lead to increased volume not only with Weatherford but potentially one or two other partners.

However, in the last 30 to 45 days, the market itself took an unexpected downturn down from what we were previously operating at. And so it's very difficult to see in the fourth-quarter numbers the impact of the Weatherford because the additional Weatherford business and margin that we gained did not overcome to fall-off in the general market conditions.

Do you have good visibility into 4Q?

The visibility is very poor right now, and this downturn, latest downturn, was unexpected. And so it's very short.

Got it. And if I look at Weatherford, I'm just curious. You put out the information, but it was more qualitative than it was quantitative. And I'm curious if you can talk to maybe the numbers in the deal. We understand the margin impact going historic margins for the business line. But I'm wondering if you can give some kind of understanding as to what you expect maybe to happen in 2016 or beyond and how fast does it ramp and to what degree.

Well, it's the thing where we are careful there because we have not put forth the guidance yet for 2016, and there's, again, a number of factors there. We fully expect our business to ramp with Weatherford. Weatherford will be, in the very near term, one of our larger customers. However, it's in a backdrop where -- or context in which the overall market is weakening, and we expect that weakening to continue into this fourth quarter and into the first quarter of next year. By the end of the year, we expect that our sales of DynaStage are going to be quite strong, but we are not quite certain yet as to how that impacts the overall revenue and margin of DynaEnergetics.

And how big, over time, do you anticipate they will be?

Well, we expect DynaStage itself to be our largest single product for DynaEnergetics, and we are anticipating Weatherford to be one of our largest customers, period. But again, we are just right in the beginnings of the market introduction of that.

I think we've talked previously about the business potentially doubling over time. Do you still anticipate that that's the potential for DynaStage?

We believe for the business to double we need to see a return to a healthy market, and I think that with a return to a healthy market and DynaStage, coupled with the other products in our pipeline, would enable that on a medium to longer term.

Got it. Can you quantify the booking push in NobelClad that you talked about?

The bookings for the quarter were about $26 million. I believe it brought our backlog from roughly $37 million up to $41 million. And so we were pleased with the bookings, albeit it's still at a level -- the backlog increased because the sales on NobelClad were also soft for the month.

Sure. Now, the bookings push that you talked about that would have fit this quarter but didn't was pushed out to 4Q and beyond. Can you talk about how many orders were pushed?

Just a couple, but they were sizable orders that went into -- the orders are not lost. They are just pushed out into the coming year.

Sure. I'm asking for dollar amounts, absolute dollar amounts.

In the $2 million to $4 million range.

And how many?

Two.

Or is that combined?

That's combined.

Got it. Thank you.

Gerard Sweeney, ROTH Capital.

Just to circle back to Weatherford, you mentioned multiple RFPs out there. What -- can you give us any details on the RFPs? I mean are they specific amounts, certain areas, timeframes, any type of nuance that you can provide on that front?

Right now the industry is pretty much operating hand to mouth, if you will, and the RFPs are -- within the partnership agreement that we have put together are really driven by the activities in specific basins. And we are referring to DynaStage. And what we are also working on there is additional partnership agreements with other large service companies, and I think that's the primary focus point.

Got it. And then if you talk to Western and all your other customers, what is the tone out there? I mean, obviously, we've taken another leg down, and things are (inaudible) again. Is this -- any sense that, hey, let's just cut our losses for 2015, circle the wagons, let's start looking out to 2016. Maybe we will start deploying more capital in 2016, or is it we are battening down the hatches and it is going to be a wild type? Can you give any (multiple speakers)?

Yes. Part of this is from our customer visits. Part of it is also listening to and reading some of the other earnings releases, but there's a couple of different views in that, first of all, I think everybody right now is anticipating the fourth quarter of 2015 and the first quarter of 2016 to be very slow, perhaps maybe even the slowest part of this downturn. And then it's kind of a split decision, if you will, in terms of the market improving in the mid to second half of 2016, until early into 2017. And there's a lot of E&P spending that is being ratcheted down 2014 to 2015 and then 2015 to 2016. And so the service companies, at least the people that we are talking to, are really looking at this as a second-half 2016 event to early into 2017 before the market improves of any significance.

Any areas of opportunity that emerge? Before there was the frac loss, there were a lot of wells drilled. But obviously there was -- there's some talk about going back and re-fracking existing wells to jumpstart some of the production again. Do you know of any of that, or was DynaStage in that or fit into that, and would the call statements be a benefit? Any type of little opportunities, the diamonds in the rough, let's say, that may be kind of sitting out there?

I would imagine there are opportunities, but when we step back and look at the overall market, we are of the view that the fourth and first quarter are going to be slow and then it will start picking up thereafter.

The important thing with DynaSelect and DynaStage is that we are actually part of lowering the cost of completions, whether that's a re-frac or whether that's a new well. And so we are optimistic with our product offering.

We also have some products in well abandonment that we are encouraged about going into 2016, but really they apply to the overall market. And I'd probably say we don't see any niche that's going to offset the overall level of activity.

Okay. And then just shifting over to NobelClad, essentially best bookings in several quarters. I think you did mention that end markets are little bit slow, but you are seeing some of this in the oil and gas market. Again, it's probably a question that has been out there. It gets asked quite a bit. But how is overall quoting? You've made some investments in expanding into different end markets.

I think you talked on the call about having a little bit more of a consultative position with some clients that is starting to evolve. Any tangible evidence of seeing some growth or continued growth in the NobelClad?

We are seeing the chemical markets and some of the specialty markets picking up and our quoting activity there being fairly strong relative to recent years.

We are also seeing some of the downstream petrochemical activity being reasonably strong. However, what is offsetting some of the quoting in those areas are the -- some of the capital spending by the larger integrated oil companies is being cut back across the board. So we are seeing a pullback in some of the oil-related client applications at the same time that we are seeing the specialty chemical applications improve.

Got it. Okay. I think that's all that -- all from my side. I appreciate it.

Robert Connors, Stifel.

I actually -- if you were to look at the EBITDA margins, just address it by both segments, and I'm looking at it on a before-items basis, so excluding the restructuring and what have you, and I saw that the NobelClad EBITDA margins were about 12.83%, sort of ticked up sequentially despite the decline in revenues. So just wondering was there a mix? Was there maybe some favorable cost on foreign operations that helped on the currency translation? Just what you guys are seeing there?

The currency translation worked against us, if you will. But what we did see -- and this was towards the end of the quarter in Q3 -- is an improvement in our operating performance at our European facilities. You may recall that we acquired a new facility in Germany a year ago, and we have turned our France facility into a specialty location and moved a lot of the large plate production to Germany. And we actually saw, towards the end of the quarter, September in particular, that both facilities turn to a healthy volume and a healthy profit, which is the first time in a long time. So we are starting to see some of the benefits of the NobelClad restructuring that started a year ago.

Now, I know the visibility on DynaEnergetics is low, but I mean do you think with that restructuring and they have the volumes at least into 2016, you could continue to see those benefits, or is this just sort of one-time?

On NobelClad we expect to see those benefits continue into the full year, and there will be higher months compared to others. But we expect that efficiency to carry into the full year.

And DynaEnergetics, there's a couple of things going on. We have, in both businesses, DynaEnergetics in particular, we are doing some restructuring, if you will, on our fixed costs, our infrastructure costs, where we close the facility in Canada, as well as, as I mentioned, on NobelClad we did consolidation there in Europe. And the structural costs will carry into -- the lower structural costs will help us going into the coming year.

On DynaEnergetics, we were probably slower than we should be on some of the activity-based costs into the quarter, and in our margins there, we expect to improve going forward.

It's an important -- it's important for us to note, too, that in addition to the structural things and activity-based cost savings that we are working on, we are making significant operating expense investments in DynaEnergetics in this down period, primarily because of our confidence in the new products and the acceptance that our new products are getting into the market. And so we are making investments in a down period, and we carry that cost structure into -- we are carrying that cost structure into this quarter and into the new year.

What I'm trying to get a sense of is I always view NobelClad, at least, on an adjusted EBITDA, it's sort of like a 10% to 20% EBITDA business. So just given this new environment at least for DynaEnergetics, is it a mid to high single-digit EBITDA type business? Or, given the market share you are taking on the DynaSelect and some of the cost reduction initiatives, is it going to get back to a double-digit EBITDA type business?

We fully expect it to get back to a double-digit EBITDA business. It has very strong value creating products for our customers. And in fact, the value that they create around the wellhead is much greater than the cost of their products. And so that business will recover to strong double-digit EBITDA margins.

And the question is the timing, really, and to foster that, we also need a strengthening of the overall market.

Robert, I think for the short term, though, you are going to see that single-digit level in between the, call it, 5% to 10% range.

Okay. That's helpful. And then can you guys just remind us, you touched on it in the press release, just regarding the covenants. What particularly are you watching? Is it the adjusted EBITDA level? Is it EBIT? Just wondering like which line item or line items we should be keeping our eye on.

Yes. So we are just keeping a close watch on both our debt levels and our EBITDA levels. If you look back at Q2, our debt to EBITDA leverage ratio is 1.44X. At the end of the third quarter, it's 2.01X. And based on our forecast, we see it exceeding that 2X in the fourth quarter and in the short term.

Okay. Great. Thank you.

Gregory Macosko, Montrose Advisors.

Just some quick questions so I better understand the DynaStage situation. First off, in terms of the people needed in the field, etc., have you added people, or can you use the same people to explain the product and work with the customer? Or is Weatherford working and covering some of that education and the like to get the product placed?

It's a good question, Greg. We have added sales people in the field in different basins and areas that we were not covered in at the same time that we have strengthened our product marketing team and invested into, if you will, a traveling roadshow. We presented a white paper at the Society of Petroleum Engineers Conference recently in Houston, and then we have embarked upon a visit to large E&P companies in the Texas area and, quite frankly, all over the country, which we are doing in concert with Weatherford and to introduce the DynaStage product line. And so there's a fair amount of promotion and market introduction and education and training that's taking place, both of E&P companies, if you will, to get the pull through in the wells that they are producing but also with the Weatherford and some of the other wireline service companies to educate and train people on our products.

Does Weatherford buy a product or have a product that they use and put in place and run it and show the customer how it works, or is it really just an RFP if you sell it direct and so they basically have to take a chance on it?

They buy it from us, and they are putting it downhole, and it's becoming part of their day to day operating activities.

Okay. And then finally, you mentioned -- you've talked twice about other partners, other situations. And I'm assuming, then, with Weatherford, it's not exclusive or anything like that. And could you sign a Halliburton or somebody else like that and use the product even in the same basin?

It's the limited partnership agreements that we intend to enter into. And we would rather have strong relationships with a few dedicated companies that, in addition to us making a commit to them, they are making a commitment to us from a promotion of this product into the marketplace. And so we will have a small number -- you can count them on one hand or less -- of these partnership agreements going forward, at least that's what we are anticipating right now.

Okay. Thank you very much.

(Operator Instructions) Edward Marshall, Sidoti & Company.

Other expense line, Mike? What was that number? I mean what ran through there? Why was the reversal of the profits earlier in the year with an income?

Are you talking about the other income, other expense of $1.5 million?

Yes.

That's unrealized foreign currency losses, primarily on intercompany transactions due mostly to the weakening of the ruble against the euro, as well as the US dollar and Canadian dollar against the euro as well. Mostly -- (multiple speakers).

So it's the balance sheet, just the changes on the balance sheet and non-cash, basically?

It's non-cash.

What was the full expense, or is the whole [$1.463 million] the expense?

Correct, yes. (Multiple speakers).

What is going on in Russia? Where do we stand with the new facilities there?

The new facilities are complete. We are producing and shipping components, primarily guns, and the shaped charge facility is complete and going through the licensing. And we fully expect that to be -- it's operational. We expect it to be commercially operational at the end of this year or early into next, at the latest. But if (multiple speakers) -- go ahead.

Can you talk about the differences in the markets? I mean we all know what's going on in North America, and obviously it's reflective globally. But is there much difference to what's going on in Russia and maybe the Middle East, in reference to what's going on in North America?

There is. The unconventional market is primarily a North American market, and that's where we are -- they are some of the higher-end cost basins, and that's where we are seeing probably the most significant drop off in activity. I don't have our sales in front of us, but the North American activity was down more than the international activity. And that's pretty much reflected throughout the entire industry.

And you mentioned quite a bit of cost takeout throughout this call, and I know there were a few press releases on it at times. Can you quantify exactly what costs were taken out of the business in 2015 year-to-date?

There's two types of costs. There's the structural costs in terms of the facilities that we are closing, which we are consolidating NobelClad in Europe, our large plate production into our German facility. We've closed completely our manufacturing facility in Edmonton, Alberta, for DynaEnergetics. We've closed six, I think maybe seven distribution centers at the same time that we opened up a central distribution center at our Blum manufacturing facility.

And so there's the structural things. The majority of the activity going forward are really transactional expenses, really aligning direct labor with the market. And to that end, we've reduced shifts and also reduced the level of employment from a direct labor standpoint. That accelerated in October. I think we were down just under 10% in terms of employment year-to-date compared to the prior year, at the end of September, but that has accelerated quite a bit into October.

Got it. But there's no dollar value that you can put to these costs? Obviously, the transactional expenses will come back, but the savings from the structural cost takeout will stick around for a while. And then you will essentially get efficiencies off the new facilities as well, I assume. Is there a way to quantify it?

That will be quantified, if you will, in terms of our guidance as we go into 2016. There's a number of moving parts. As the structural costs come down, the transactional costs come out. They need to be offset with the investments that we are making on the product launch. And there has also been -- we are doing fairly well holding our own in terms of product pricing, but there has been a tremendous amount of pricing pressure in this market also. So we could give you a number, but it may be misleading if you rolled it altogether and not take into consideration all the other moving parts.

Okay. I got you. Thank you very much.

Jim Brilliant, Century Management.

I got on the call a little late, so I don't know if you had addressed this. But did you quantify what the revenue level out of Weatherford was for the quarter?

We did not, and we did say that that's moving from a limited number of guns, no margin, on a development program, testing program into full commercial production at higher margin, and it's starting to ramp. The ramp is really twofold. It is having E&P companies specify that product in their wells and at the same time getting Weatherford to use this in more of the wells that they are quoting and going after. And that is beginning to ramp.

So the difficulty is really the inventory -- twofold, you know. Just listening to Schlumberger and Halliburton, Weatherford, they are all talking about the capital spending dump. A lot of the E&P guys have already expanded their budgets, and it is pretty much oilfields are going to be shut down from Thanksgiving to Christmas for the most part. Where do you sense your customers are in terms of having both components and guns in the field in terms of inventory?

I don't know if there's much inventory in the field per se. I think that there, particularly in the North American market, it's a short turnaround business. We built up inventory in the third quarter, second and third quarter, components for DynaStage and some of the new products that we are introducing, that we are now working down with the commercial introduction. But I don't think there's much inventory in the system in the marketplace.

Okay. So we don't have a lot of overhang. So is it your sense, then, that as the budgets are flushed through the end of the year and we come out of the holiday seasons in the January timeframe, that production should begin to ramp up with the new capital budgets and your business will follow that, or is there something deeper involved in terms of (multiple speakers) the gun business?

In our view, from the people that we've talked to and also being exposed to some of the same things that you are being exposed to, is that the first quarter is not going to be gangbusters; it's going to be a soft quarter, and then the activity will pick up, potentially, as the year unfolds.

Okay. So there's no overhang from an inventory that we have to work through. So you will respond pretty quickly with well counts as they come up through the first half of the year?

Yes, I think we will respond very fast to that.

The well -- okay. And the other parties with completion technology, they are pushing stages closer together. Is that part of the Weatherford solution, or is it just getting them in the field now?

That I'm less familiar with in terms of how that is part of Weatherford's strategy. I think that what I've read is that there's a lot of existing basins that, by putting the laterals closer together that you get more out of those basins. And our products will benefit from that because all those laterals need to be perforated.

Okay. And when do you expect any of these new partnerships (inaudible)?

Over the next three to six months, and we are working with people as we speak, and it depends on how it moves through their organization in the current environment.

Okay. And then finally, on the covenants issue, I take it your most restrictive is debt to EBITDA?

Yes. We are covered by two ratios. We have the debt to EBITDA, as you mentioned, as well as the debt service coverage ratio.

And what is the peer? At what point would you increase it? What's the covenant on the debt to EBITDA?

3X.

3X? Okay. And you will go beyond 2X in the fourth quarter for adjusted items?

Yes, we will exceed 2X in the fourth quarter.

Okay. That will do it for me. Thanks, guys.

At this time, we are showing no further questions. We will go ahead and conclude our question-and-answer session. I would now like to turn the floor back over to Mr. Kevin Longe for closing remarks. Sir?

Thank you for joining our call today, and as always, we appreciate your continued interest in DMC and look forward to speaking with you again after the fourth quarter. So thank you very much.